ARM Holdings chief executive Warren East has played down the market furore over the chip designer's recent drop in royalties, saying the company has no plans to make royalties its major source of income.

East was also guardedly upbeat about the state of the chip market, saying ARM's semiconductors have recently become "more positive than they have been." 3G will continue to boost the company's bottom line, he said, and if it takes longer than expected to arrive, it will be all the better for ARM.

Speaking to ZDNet UK on Monday after ARM released the results for its first quarter ended 31 March, East said ARM's 6 percent quarterly decline in royalties had been expected. "Volumes increased by about 15 percent, but there was fierce pricing competition within the semiconductor industry," he said. "Due to the balance of power between suppliers and customers, the semiconductor companies got squeezed on price. We knew they would."

ARM licenses a variety of cores to chip makers for use in everything from set-top boxes to handheld computers, and has become a de facto standard in the mobile phone and PDA industries. ARM-based chips power all Pocket PC devices and this year Palm will switch its PDAs to ARM chips. In two-thirds of the licence deals, the royalties are fixed at a percentage of the price of the ARM-based chip, so that any drop in the chip price comes directly out of ARM's revenues.

The drop was also due to a change in product mix, namely the introduction of a large number of lower-cost products such as smart card devices, East said. And adding to the effect, the preceding quarter had been artificially high because of revenues that emerged from a royalty audit.

East said royalty revenues will go up again once the price battles die down. "We know it's a cyclical thing. Prices will firm," he said. "Products shipping at given prices today will change, some will increase, and some companies will get prices up again by (redesigning) and putting in additional (ARM) products with new features."

Royalties are important for the bottom line because they are essentially pure profit, but East emphasised that they only make up 15 percent of income at the moment, and are unlikely to get much above previous highs of 27 percent. "If our income became mostly royalty-driven, that would indicate we were not doing enough new designs, and we would get designed out. When royalties get to be a significant part of revenues, it's not a good sign," he said.

Together, royalties and licence fees make up about 70 percent of ARM's revenues.

ARM is already shipping a significant amount of technology for 3G, the next-generation wireless technology that will allow mobile phones to exchange real-time video and other high-bandwidth content, East said. "3G is already contributing to ARM's bottom line," he said, for example helping the adoption of ARM's 926 processing core for wireless applications.

"We expect that if 3G takes longer to roll out, it will be a good thing, it will help to drive licences for the products coming on after the 926 core, like Jaguar." Jaguar is a 64-bit core designed for 3G handsets, which was unveiled last year.

East said some mobile phone handsets using newer ARM technology are "starting to ship". Other devices ARM expects to eventually add to revenues include mass storage devices, printers and digital cameras. Networking equipment like wireless hotspots, voice-over-IP phones and telecommunications infrastructure is "still a bit sluggish", East said.

ARM makes back its development costs on a product after it sells about six licences. After that, "licencing is just as profitable as royalties," East said.

See Chips Centralfor the latest headlines on processors and semiconductors.

To find out more about the computers and hardware that these chips are being used in, see ZDNet UK's Hardware News Section.

Thank You

By registering you become a member of the CBS Interactive family of sites and you have read and agree to the Terms of Use, Privacy Policy and Video Services Policy. You agree to receive updates, alerts and promotions from CBS and that CBS may share information about you with our marketing partners so that they may contact you by email or otherwise about their products or services.
You will also receive a complimentary subscription to the ZDNet's Tech Update Today and ZDNet Announcement newsletters. You may unsubscribe from these newsletters at any time.